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Thursday 21 September 2006

The Moats Around CastlesIf noblemen were asked key characterestics of a good castle, they would say it should first of all serve the county it is in, it should then be able to provide food and shelter to the occupants, then it should be secure enough with thick walls and moats built around it, then it should have a regular supply or stock of essential things (food, water, toilet paper, internet connection ...) and finally it should have a good leader in command to run the place.

PVR Ltd is a company that in my humble opinion has big wide moats built around it castle. It is operating in an industry that is growing leaps and bounds (the castle has enough meat to not allow the occupants - shareholders die of starvation). They have the pricing power (the walls around the castle are huge and rock solid). The customers are loyal (there are people bringing in bread and butter in the castle without fail everyday). The purchasing power of the customers is increasing and more than that they are coming out in open andd beginning to spend it (every one is bringing larger potions). The brand is impeccable (people are voluntarily giving meat and they would not go anywhere else). And most critical of them all - they have the negotiating power with the suppliers. If they decide not to screen any movie, nationwide collections for that movie hit the rock bottom. The producers and the financers come literally begging on the doors of Bijlis (the county that this castle was supposed to serve - the film industry, is instead serving this castle).

ManagementManagement is as good as it gets. Initially a family run business with Ajjay (with two Js) Bijli managing things. The promotors own more than 40% shares in the company. They have very very high incentives and punishments to work hard to increase the shareholder value.

Growth StoryIn past few years they have grown from a one-screen theatre (Priya) to the largest number of screens in the country with presence in all major metros. Future plans include foray into film production, small one-screen theatres in category B and C cities, use of technology to enhance the movie-watching experience, use of technology to cut costs among other things. The only thing that remains to be seen before an investment decision is made is the price. If we buy, we would be part owners in a good company and good business and good growth industry but we would not have made a good investment decision. Buying a good business at high price is like packing loads and loads of money into gunny bags and forgetting it for years. The same money when unpacked after years would not be as useful as it would have been when it was packed (remember our dear friend called Inflation ..?).

The FinancialsBefore picking up a partnership in this company, the only thing now left worth consideration is the price. It should be cheap (we should get more value for investment). Please note cheap does not mean a low P/E or low P/BV. It has more to it. For example if someone read the reports published by PVR, few things stand out. The most striking thing is the "Film Distributor's Share" accounts for as much as 33% (and increasing) of the total expenditure of the company. We would assume FDS as raw material for PVR Ltd. Second, "Rent" is also very high. It accounts for 14% (and increasing) of expenditure.

Certainly worth spending some time on PVR and identifying the reason to buy.

"Just another person" posted the following comment ...

Hi,

I read ur post and found it quite interesting..but i have a few comments/questions1. a little bit deeper analysis would show that the seat occupany/load factore for PVR is only healthy on weekends..On weekdays u can get a ticket at the 12th hour also and u find 30-40% of the theatre empty. How sustainable is the revnue of this company???2.how can u guys forget about the indirect competitors like Home theatres who will be eating into the share of this compay. A person who can afford a ticket of 560(180*4) for his family can also afford to buy a home theatre. Lets assume currently only 10% of people of this kindaa are available. but in India where showoff is a must and junta will buy home theatres just to make "Neighbour's Envy" will slowly move to watching movies at home.3. I don't have numbers to support this but there has been few movies that actually make good profits. Most of them are just above break even.Beyond this whatever profit the movie makes, the major share is taken by smebody else and very little comes in the kitty of the theatre (u ave already covered this point)

So I m not very sure f the MOAT around this castle.

And here is our reply to the same ...

Hi,

Thanks for the comments. Without wasting words, here are my views ...

1. The point you raised about occupancy is very valid. In fact we completely ignored that aspect. We focused only on increasing number of seats and how market share is going to tilt towards PVR in the long run. You have mentioned that on the weekdays almost half the theater is empty. True. But in my opinion (and I might be wrong), the cost for the company (PVR) is only the cost of the master-print. From what I understand, they buy a master copy and then negotiate the prices for number of screens and then they just duplicate the number of copies. Yes the costs are there but this also gives them negotiating power. Recently for the launch of Lage Raho Munnabhai, the multiplexes did not agree to the prices quoted by distributors and hence there was a delay. That's why the moat. I still don't know a lot of things about movie screening business. If you know, please share ... it would be of great help.

2. Again a very valid point. Indirect competition is there. You mentioned about Home Theatre Systems. Then there are things like DTH, dramatics etc. In fact when I first thought about PVR, I thought of it as a player in entire entertainment industry (indirect competition includes things like books, television, radio etc - basically what people do for killing spare time). But when I talked to a few people who actually go to movie halls (I don’t watch movies – last movie I saw in theatre was in 2005), I realized the experience of watching movie in a hall is something that can't be replicated by even best of systems. I would thus agree to disagree to what you have said. The number of people watching movies would NOT come down. (I am open to debate on this .. :)).

3. Finally the last point is also very valid. May be less than half of the movies do break even, but I think even if a movie is a flop, the screening can be profitable. May be the collections are not high enough to compensate the cost incurred in making the film but if a certain percentage of the hall is occupied, the cinema hall might recover operating cost (if not the capex). There are two different parties involved here – film producer and the screener (PVR). Again I don’t have data to support this argument ... so can be fallacious.

And you gave me a bonus point by saying that I covered the fact that most of the profits are taken by someone else not the screener – I don't think I covered it :). You seem interested in entertainment; can you please tell me your opinion on PVR guys entering movie production and distribution business too? What are the scopes and how would it affect the performance of the business.. ? And there is one thing that I have ignored all along. The revenues from the F&B business in the intervals, advertisements in the hall before the movie - all that also contributes to the bottomline .. !!!

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Disclaimer: We do not give any stock recommendations. This is a collection of personal views and opinions on the Indian Stock Market.

We try to invest in the Indian stocks on the Value Investing principles and lessons from Warren E. Buffet, Charlie Munger, Prof. Benjamin Graham, Prof. Bruce Greenwald, Prof. Sanjay Bakshi and other value investors.

And there are times when we are blinded by the possibility of profits and do divert from deep value in stocks. We are imperfect in the way we research our stocks but we are trying to learn and this blog will be an archive of our experiments.